Tax & Business Alert – October 2023
Abstract: Many people who began working from home
during the COVID-19 pandemic are still doing so, full or part-time. Business
owners who moved their operations to a home office, or at least began
performing some work functions there, may be able to claim home office expenses
against their business income. This article describes how to qualify for home
office deductions and the two methods owners can choose from to claim this tax
break.
The
COVID-19 pandemic changed the landscape of work for a lot of people, as numerous
business owners began working from their homes. Many are still working from
their home offices, whether full-time or on a hybrid basis. If you’re
self-employed and run your business from home, or perform certain functions
there, you might be able to claim deductions for home office expenses against
your business income. There are two methods for claiming this tax break: the
actual expenses method and the simplified method.
How to
qualify
In
general, a self-employed taxpayer qualifies for home office deductions if part
of his or her home is used “regularly and exclusively” as the principal place
of business.
If
your home isn’t your principal place of business, you may still be able to
deduct home office expenses if:
1.
You
physically meet with patients, clients or customers on your premises, or
2.
You
use a storage area in your home (or a separate free-standing structure, such as
a garage) exclusively and regularly for business.
Expenses
you can deduct
Many
eligible taxpayers deduct actual expenses when they claim home office
deductions. Deductible home office expenses may include:
But
keeping track of actual expenses can take time and it requires organized
recordkeeping.
The simpler method
Fortunately,
there’s a simplified method: You can deduct $5 for each square foot of home
office space, up to a maximum total of $1,500.
The
cap can make the simplified method less valuable for larger home office spaces.
Even for small spaces, taxpayers may qualify for bigger deductions using the
actual expense method. So tracking your actual expenses can be worth it.
Changing
methods
When
claiming home office deductions, you’re not stuck with a particular method. For
instance, you might have chosen the actual expense method when you filed your
2022 return, but then use the simplified method when you file your 2023 return
next year, and the following year switch back to the actual expense method. The
choice is yours.
What if I
sell the home?
If
you sell — at a profit — a home on which you claimed home office deductions,
there may be tax implications, though they are beyond the scope of this
article. We can explain them to you.
Also
be aware that the amount of your deductions is subject to limitations based on
the income attributable to your use of the office. Other rules and limitations
may apply. But any home office expenses that can’t be deducted because of these
limitations can be carried over and deducted in later years.
Different
rules for employees
Unfortunately,
the Tax Cuts and Jobs Act suspended home office deductions from 2018 through
2025 for employees. Those who receive paychecks or Form W-2s aren’t
eligible for deductions, even if they’re currently working from home because
their employers don’t provide office space.
We
can help you determine if you’re eligible for home office deductions and how to
proceed in your situation.
© 2023